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Jefferies Starts BATS With Hold, Looks For More Attractive Entry Point

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May 10, 2016 1:28 pm
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Jefferies initiated coverage of BATS Global Markets, Inc. (BATS: BATS) with a Hold rating and $28 price target, saying that the exchange operator’s strong fundamentals and future growth is already priced in to the shares.

“BATS represents a solid growth story with exposure to attractive end markets in options, global equities and FX. The company has a proven track record of efficient market share gains that we believe can be replicated across additional products. However, at current levels we view the risk/reward as fairly balanced,” analyst Daniel Fannon wrote in a note.

Fannon said the company’s significant incremental growth opportunities would come from options and forex.

BATS, which went public on April 15 at $19/share, could see strong growth in next 12–24 months from its current/future products in options, and market data in FX, apart from opportunities for charging connectivity fees on a broader scale.

“With approx. 10 percent market share in equity options, growth will come from add’l product capabilities, the development of higher margin option products, and the expansion of its second options exchange, EDGX,” Fannon elaborated.

Related Link: BATS Should Be A Great Hedge For Choppy Markets, According To Morgan Stanley

The analyst noted that the exchange’s volumes would get a boost from new regulatory standards coupled with a migration from OTC toward electronic trading.

The analyst continued, stating BATS’ non-transactional revenue has more than doubled since 2013 and he expects about 11 percent CAGR growth through 2018.

Furthermore, Fannon noted BATS has plenty of room to increase its quarterly dividend of $0.08 a share, given more than $250 million in annual EBITDA. The analyst expects 2016 EPS of $1.28 on revenue of $423 million.

“Despite these positive trends, we believe that these factors are incorporated into our estimates and subsequently in the current valuation at 20.5x our 2016 and 17.8x our 2017 estimates. With exchange industry group multiples at multi year highs, we look for a more attractive entry point to become more positive on the shares,” Fannon added.

Separately, Barclays has initiated coverage on BATS with an Equal Weight rating and $25 price target, saying that the company’s valuation is preventing it from being “more aggressive on the shares.”

At time of writing, BATS was down 2.96 percent on the day at $25.20.


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